The Development of a Theory of Rational Intertemporal Choice

Abstract

The aim of this article is to describe the evolution of a very dynamic theory: the theory of intertemporal choice. I present the first economic thinking on intertemporal decision-making, and expose how it resulted in Samuelsons famous discounted utility model; then I describe how and why discounted utility became the standard approach to intertemporal choice in economics through the alleged normative and positive validity of dynamic consistency. Next, I review how the widening of experiments challenged discounted utility together with the dynamic consistency hypothesis, and turned intertemporal choice into a truly interdiscipli- nary field of research. Finally, I discuss the foundations of dynamic consistency and prove that it is neither normatively nor descriptively justified as a necessary axiom of rational inter- temporal choice. I also show how until only recently, the dynamic consistency debate has had a blinding effect on the relative importance attributed to other fundamental anomalies in discounted utility. And this blinding effect can be regarded as a further side-effect of the excessive role given to dynamic consistency along these years. I thus conclude that dynamic consistency has been acting as an invisible straitjacket obstructing the development of inter- temporal choice theory, and that it is only by undoing it that this field of research can achie- ve in the future a satisfactory understanding of human decision-making.